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'Biggest crisis' to affect local government aid

ST. PAUL - Minnesota's local governments receive 30 percent of their revenue from the state, so when the state budget is sick, local governments sniffle.

Now, with a massive state budget deficit, the affliction is much worse than a cold. Many say legislators must resort to major surgery to reduce local government funding flowing from the state.

With a budget deficit that could top $6 billion, there is no doubt cities, counties and townships will lose state money. But at this point, no one knows if the surgery will involve a scalpel or a chain saw.

"This at least feels like the biggest crisis we've ever been in," said Tim Flaherty of the Coalition of Greater Minnesota Cities, who has been involved in government budgets since the 1980s.

How to deal with local aids will be a major issue facing the 2009 Legislature when it convenes at noon Jan. 6.

With a tanking economy, state taxes and fees are falling. They now are predicted to be $4.85 billion short of planned spending, and most experts say that deficit will grow to more than $6 billion in the next few months.

Since even the biggest tax fan does not think raising taxes will solve the problem, the state is faced with making massive cuts. Some of those cuts will be in money cities, townships and counties receive. Property tax increases by local governments likely will accompany those state cuts.

"I have come to the concession that there will be property tax increases when we cut aids," said Rep. Paul Marquart, DFL-Dilworth, who as House property tax chairman will be a key figure on how local governments are affected by the state budget problem.

Senate Taxes Chairman Tom Bakk, DFL-Cook, said that allowing local governments to raise property taxes is a possibility. "You can pick up some pretty big money there, but there is pretty big impact back in communities."

Minneapolis, St. Paul and rural communities rely most heavily on state payments. In some cases, state money is half of cities' budgets. Many Twin Cities' suburbs, with growing legislative influence, get little state help

Payments to local governments top $2 billion in the two-year state budget, which in the cycle that ends June 30 spends about $34 billion.

The first solid indication of how big a hit local governments might take to help balance the state budget comes by Jan. 27, Gov. Tim Pawlenty's deadline for releasing his two-year budget proposal. There is little doubt that state aid will be high on his hit list.

While plugging a $426 million hole in the current budget, Pawlenty used $110 million that had been destined for cities and counties. And his revenue commissioner, whose department handles local government payments, said local aids are not the Republican governor's favorite.

Commissioner Warn Einess said Pawlenty tends to look at property tax refund payments, which go directly to taxpayers, as his top property tax priority. Such direct payments to taxpayers who need it most are preferred, he added.

"That has always been the most efficient way of keeping people's property taxes down," Einess said.

"Local government aid and county aid are further down the pecking order," Einess added.

Einess said there is no compelling proof that local aids keep property taxes low.

Pawlenty has yet to decide just what to do about local aides, Einess said. "We have run a number of different scenarios."

Rural lawmakers, especially, are worried about what scenario emerges.

"I think that cuts to local governments are just shifting the burden again," said Rep. Kent Eken, DFL-Twin Valley, a common complaint among rural lawmakers.

Since suburban cities get little state aid, a cut in aid payments most hurts rural areas and the state's two largest cities.

Pawlenty faces plenty of opposition to cutting cities' local government aid, the big state payment program, even in his own party.

"LGA absolutely needs to be preserved," said Rep. Morrie Lanning, R-Moorhead. "There is no question about that. There are those who want to eliminate LGA, but that cannot happen."

The aid was established so cities like Moorhead that have low property values still can provide adequate police, fire and other services. Local governments depend upon property taxes to fund much of the budget, and the theory is that if they cannot raise enough in property taxes, they cannot provide essential services equal to property-rich communities.

While Pawlenty criticizes how some cities use local aid, city leaders say it is a vital revenue source.

Flaherty said cities have done a lot to reduce costs and are operating about as efficiently as possible.

"The cities have been making a lot of changes in their service delivery and reducing their costs," he said.

City leaders say there is little more they can do, and say the state needs to keep aid payments high. And, Flaherty said, everyone getting state payments - including schools - must be included in any cuts. Schools were spared any cuts when Pawlenty balanced the current budget.

While many city leaders appear upset over the expected cuts, Executive Director Jim Mulder of the Association of Minnesota Counties takes a different tactic.

"Being angry about it doesn't change anything," Mulder said.

Mulder takes a realistic approach.

"I think every single one of our aid programs will be at risk or considered for change," he said.

Pawlenty praised Mulder's association for its attitude and its efforts to make changes.

For instance, rules governing many health and human services programs that the state mandates and counties operate have remained pretty much the same for decades. Mulder said if the state gives counties more freedom, they can save money.

"We are measured on how much we spend," Mulder said about a mental health program, while measuring counties on how successful they are with the patients would be a better system.

Mulder and Flaherty agreed that one way for local governments to save money is for the state to lift costly mandates placed on cities, counties and townships.

"What we are asking is to give us the tools to be able to respond," Mulder said. "You have to give us all of the choices. We don't have the choice to pass it on to somebody else other than taxpayers."

Some communities, such as Moorhead, have large enough budget reserves to survive modest cuts, Lanning said.

"As the original architect for reserves in Moorhead, I know you need reserves to handle unanticipated reductions in revenues," the long-time Moorhead mayor said.

Marquart is concerned that suburbs may get off without providing much money to balance the state budget.

"We need to make sure everyone shares the pain equally," he said. "Local government aid is the great equalizer in that it allows communities, especially rural communities, to provide good services at a reasonable cost."

Rep. Steve Drazkowski, R-Wabasha, said his biggest concern about local aid cuts is with small communities.

"My hope is we can focus those efforts on the smaller communities that really need the help," Drazkowski said.

"It seems to me there has been some mission drift, if you will," he added. "Now it has really drifted into becoming just part of many cities' budgets. Many of them certainly are not using them to fund those essential services."

Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.